Exchange-Traded Funds (ETFs) are funds that hold securities such as stocks, bonds, or commodities, and trade on stock exchanges. ETFs have gained widespread global popularity due to their low expense ratios, ease of trading, and ability to diversify investments across sectors efficiently. According to a report by PwC, global ETF AuM grew by a record 27% to reach $14.6 trillion in 2024, and are expected to more than double to $30 trillion by June 2029.
The GCC: An Emerging But Unique Market for ETFs
The Gulf Cooperation Council (GCC) region represents an emerging but unique market for ETFs. Specifically, Saudi Arabia, Qatar, and the United Arab Emirates are increasingly attractive destinations for international asset managers to set up local operations.
Role Of Sovereign Wealth Funds
The GCC countries host a vast reservoir of capital, ranging from some of the world’s largest sovereign wealth funds to an expanding base of retail investors who are increasingly active in financial markets.
Policy initiatives
Policy initiatives are accelerating ETF development, such as Saudi Arabia’s goal to increase asset management industry AUM to 40% of GDP by 2030, and Qatar’s recent removal of ETF trading fees to boost liquidity. Importantly, the upcoming GCC fund passporting system is expected to catalyze the region’s ETF market.
Shariah-Compliant ETFs
Islamic ETFs in the Middle East provide access to otherwise hard-to-reach halal assets Islamic bonds, allowing diversification among equity and fixed income Shariah-compliant strategies. This, combined with alignment to wider ESG principles, makes Shariah ETFs an important and growing segment in the global ethical investing landscape.
Tax Efficiency
Most GCC countries, such as the UAE, Saudi Arabia, and Qatar, do not impose personal income taxes or capital gains taxes on investments. This absence of direct taxation on investment income means that investors can maintain higher net returns, making ETFs and other investments especially attractive.
The Growing ETF Market in the GCC
In Saudi Arabia alone, Argaam reported that 458,000 new retail investors opened accounts last year, pushing the total to 6.6 million. Dubai experienced similar growth, with 138,262 new investors entering the market, more than double the figure from the prior year according to the Dubai Financial Market Company. Although the GCC’s combined market capitalization exceeds $2.5 trillion, ETFs remain underdeveloped with only about $800 million in assets, highlighting significant growth potential.
Risks and Challenges in the GCC ETF Landscape
Low Liquidity and Trading Volumes
The GCC ETF landscape faces notable risks and challenges, with low liquidity and trading volumes being among the most critical issues. For example, by the end of 2024, the combined trading turnover to stock market capitalization ratio for the Abu Dhabi Securities Exchange and Dubai Financial Market was around 9.7%, which is still substantially lower than global leaders like the NYSE (104%) and Hong Kong Stock Exchange (71%).
Regulatory Environment
Despite the advancement the regulatory infrastructure in GCC remains fragmented. The absence of collective investment such as the European Union’s UCITS, which allows seamless distribution of funds across member countries, has contributed to market segmentation, regulatory complexity, and barriers for foreign and regional fund managers in distributing ETFs across multiple jurisdictions.
Market Concentration
Financials, including banking alongside the energy sector dominate the region’s equity markets, often accounting for more than 50% of the weight in GCC-focused indices and ETFs. However, there is a clear shift as GCC countries aggressively pursue economic diversification under their Vision plans.
Investor Awareness and Education Gaps
ETFs remain relatively new to the retail investor base in the GCC, and significant gaps in investor awareness and education persist. Efforts to bridge this gap are underway, with an increasing number of digital brokerage and robo-advisory platforms emerging to simplify access and educate investors.
Foreign Exchange (FX) Exposure
ETFs in the GCC are subject to foreign exchange (FX) exposure risks primarily because the GCC currencies, although largely pegged to the US dollar, still expose investors to potential currency fluctuations when they invest in ETFs denominated in different currencies or hold international assets.
Who Should Consider ETFs in the GCC?
Retail Investors
Retail Investors benefit significantly from ETFs as they offer retail investors easy access to diversified portfolios at a much lower entry cost compared to mutual funds or direct stock purchases, without needing deep investment expertise or large capital. Additionally, the rise of digital platforms and robo-advisors is democratizing access to ETFs, especially among retail investors.
Institutional Investors
Asset Managers and Pension Funds use GCC ETFs to gain efficient access to commodity exposure, with cost-effective execution and real-time pricing, as seen in funds like WisdomTree’s Enhanced Commodity Strategy Fund focused on GCC markets.
Islamic Investors
Islamic ETFs are a fast-growing subset as this segment opens new investment avenues for Muslim investors seeking both faith-compliant and diversified financial instruments.
The Future of ETFs in the GCC
The future of ETFs in the GCC is poised for strong growth, driven by ambitious financial market diversification plans. According to a report by Mordor Intelligence, locally listed ETFs in the GCC are expected to grow at a compound annual growth rate (CAGR) of 10-12% from 2025 to 2030, fueled by rising investor interest in niche, thematic, and sector-specific funds.
